U.S. securitization and mortgage-
industry groups said a Federal Deposit Insurance Corp. plan for
overhauling part of the $4 trillion asset-backed securities
market could restrict credit and undermine economic recovery.

The FDIC proposal requiring sellers of securitized loans to
keep 5 percent of credit risk in exchange for protection that
makes the bonds more attractive to investors “could greatly
inhibit its effectiveness and the restart of the markets,” Tom Deutsch, executive director of the American Securitization
Forum, said in a comment letter filed with the agency today.

Deutsch’s group joined the Financial Services Roundtable
and the Mortgage Bankers Association in opposing the proposal,
released for public comment in May, saying it could damp
recovery of the securitization market, which has been largely
inactive since 2008. The comment letters also pointed to risk-
retention rules moving through Congress and other regulators as
reasons the agency shouldn’t act.

The FDIC “should leave such sweeping national policy
changes to Congress and should avoid potentially conflicting
with the provisions” of the financial-overhaul bill nearing
final approval in Washington, Mortgage Bankers Association
President John A. Courson said in a letter.

Asset-backed debt was among the largest sources of more
than $1.7 trillion of writedowns and credit losses at financial
companies since the start of 2007, according to Bloomberg data.

Additional Disclosure

The FDIC proposal would require additional disclosures by
sellers, including the structure of the bond and the credit and
payment performance of its loans. It also would seek disclosure
of compensation paid for securitizations. The agency, which set
today as the deadline for comment on the measure, could put a
final rule in place as soon as this fall.

“These reforms will help restore confidence in these
markets, but in a way that promotes long-term, sustainable home
ownership,” FDIC Chairman Sheila Bair said in a June 7 speech
in Virginia.

The regulatory-overhaul bill awaiting final Senate approval
after being passed by the House yesterday includes a 5 percent
risk-retention requirement for securitizations. The Securities
and Exchange Commission in April approved a proposal to require
financial firms to hold 5 percent of each class of asset-backed
security to avoid regulatory hurdles when selling bonds.

The FDIC’s proposal is “complementary to similar efforts
under way at the SEC and new rules under consideration as part
of the financial reform package,” Bair said in a June speech at
the University of Pennsylvania’s Wharton School in Philadelphia.